Double trouble

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Double troubleOur client is RedBus, one of several operators of iconic double-decker public transport buses in London. Over the past three years RedBus have experienced declining profitability, as a result of reduced demand for buses due to growth in affordable taxi services, such as Uber.
The client is looking to understand the root cause of the issue and discuss ways to improve profitability.

Problem Definition

Our client is RedBus, one of several operators of iconic double-decker public transport buses in London. Over the past three years RedBus have experienced declining profitability, as a result of reduced demand for buses due to growth in affordable taxi services, such as Uber.

The client is looking to understand the root cause of the issue and discuss ways to improve profitability.

Comments

This is an interviewer-led case, with the typical set of questions: structuring, brainstorming, exhibit reading and quantitative. The interviewer should guide the candidate through the case.

Cost per route of a double-decker bus is £105, which requires 70 passengers in order to break even

Some routes never reach 70 passengers, others are losing money during off-peak hours

RedBus should acquire single decker buses for £420k, which will cost £61 to operate per route

Detailed Solution

Paragraphs highlighted in green indicate diagrams or tables that shall be shared in the “Case exhibits” section.

Paragraphs highlighted in blue shall be verbally communicated to the interviewee.

Paragraphs highlighted in orange indicate hints for you on how to guide the interviewee through the case.

Question 1: How would you approach helping RedBus?

Additional information to share on request:

Single-decker bus capacity: 30

Double decker bus capacity: 60

Cost of a ride: £1.50

Suggested approach

First of all, we will need to analyse the financials of RedBus to identify options for improvement.

Revenue: Number of passengers x fare per ride; segment passengers by route, are some routes more profitable than others? Are we offering any auxiliary paid services? E.g., private travel

Cost should be split to fixed and variable cost.

Fixed cost:

Bus depreciation: Can we move to cheaper buses? Can we extend the useful life of the buses?

Maintenance: Can we consolidate maintenance contracts? Can we bring maintenance in-house and save money?

Bus insurance: Can we renegotiate contracts?

Overheads: Do we have a large corporate office? Can we outsource some functions to save cost?

Variable cost:

Fuel: Can we consolidate fuel contracts and negotiate lower wholesale price? Can we switch suppliers? Can we optimise our routes to reduce the number of miles driven?

Labour: Can we reduce salaries or other compensation related costs? How is our drivers’ utilisation as compared to industry benchmarks.

Next, we would need to look at the market environment to understand the range of possible options.

Competitors: Who are the other players in London? Are they experiencing the same issues? Do they do anything differently?

Customers: What is the trend within our customer base in terms of bus usage? What do they care about most? How can we convince them to use buses more?

Regulation: What is the regulatory environment for bus operators? Can we ask for subsidies? How much flexibility do we have with route / timetable decisions?

Question 2: What is the breakeven number of passengers for a double decker bus?

Share Exhibit 1 with the candidate.

Proposed solution

An easy warm-up question: It is important to start by deciding on the unit to work with (day, route or mile). If we were to calculate the breakeven amount per route:

BE = Cost / Revenue per passenger

Cost = 1*20 + 20*1 + 50/10 + 3*20 = 233

BE = 105 / 1.5 = 70 passengers

Takeaways: 70 passengers per route sounds like a lot, it means that the bus needs to fill up more than once over one route. Since people are generally travelling in one direction during rush hours (i.e., from home to work or from work to home), and since a full bus cannot pick-up any more passengers, that could be a challenging target, especially outside of rush hours. Bus depreciation is the highest cost component, thus, we should check whether we can reduce the cost of buses or increase their useful life.

Question 3: The client has shared passenger information on 5 of its routes. What can you learn from the information?

Share Exhibit 2 with the candidate.

Key Insights

If possible, the client needs to adjust frequency of buses to make routes more profitable

Client should try to cancel route D, as it is never profitable

Route C is very profitable, but might be running out of capacity during peak hours, therefore its frequency should be increased

If the frequency cannot be reduced, the client should consider using smaller busses

Question 4: Unfortunately, the frequency of buses is regulated and RedBus cannot reduce it. However, RedBus is considering acquiring single decker buses to fully operate on some routes, and during off-peak hours on others. Their investment threshold is a 3 year payback period. Should they do it?

Share Exhibit 3 with the candidate.

Guide candidate to use Exhibit 1 for missing data. If needed, explain that the bus price is the required investment to purchase a single-decker bus.

Suggested solution

The candidate should calculate the difference in cost per trip of a single decker vs. a double decker bus, and calculate how many trips are required to payback the investment.

Cost per trip = (Depreciation per mile + fuel per mile) * number of miles per trip + insurance cost per trip + labour cost

Takeaways: Replacing some double deckers with single deckers does make sense, as the payback for investment is less than 3 years as required. The client can further improve their payback period if they are able to sell some of their double deckers to other operators. One risk to consider is the potential revenue impact due to lower capacity, hence we need to be careful when selecting routes / times to operate with a single decker.

Question 5: After looking at the cost side, RedBus would like to evaluate some ideas for increasing revenues.

Suggested structure with sample ideas

Get more passengers

Advertise the bus service – e.g., position as a greener, cheaper option

Re-design route to serve a larger population or shorten travel time

Offer benefits to frequent users (e.g., loyalty programme)

Increase income per passenger

Increase fare if possible from regulatory perspective

Sell drinks / food on board

Provide paid WiFi service

Generate revenue via auxiliary services

Offer buses for private hire for corporates

Increase advertising space inside and outside the bus

Gather and monetise usage data

There is no right or wrong answer to brainstorming question. However, you should expect the candidate to generate at least 5 reasonable ideas and communicate them in a structured manner. Ask "what else?" if the candidate generates too few ideas.

Final Question: We are meeting with the CEO of RedBus, what would you tell her?

I would recommend RedBus to start operating single decker buses on some of their routes to improve profitability, for the following reasons:

Cost per route of a double-decker is £105, which requires 70 passengers in order to break even

Some routes, like D, never reach 70 passengers, others are losing money during off-peak hours

RedBus could acquire single decker buses for £420k, which will cost £61 to operate and will pay back the investment in less than 3 years

As a next step, I would recommend looking at options to dispose of some of the double decker buses to further improve the payback period, as well as ways to attract more passengers to the buses, for example by launching a loyalty programme.

Hello John,
I will try to make it clear for you. Consider this question as a comparision of 2 alternatives. The first big assumption is regarding the revenues: you are gonna use the single decker b... (read entire answer)

Hello John,

I will try to make it clear for you. Consider this question as a comparision of 2 alternatives. The first big assumption is regarding the revenues: you are gonna use the single decker bus in the routes with low number of passenger, assuming that you can serve exactly the same amount of customers with a single decker bus.
Hence you have to do the following comparision:

Use Double decker buses: Revenues=X and Cost=Y=61£/trip

Use Single decker buses: Revenues=X, Cost=Z=41£/trip and Bus price=420k£

The usage of single decker buses is convenient only if the cost saving (Y-Z) allows you to payback the initial investment (Bus Price) in less then 3 years:

Hi Yan,
Thank you for the question.
Please note that people get on and off the bus during the journey, so the total number of people using the bus on one journey can well be above 60. However,... (read entire answer)

Hi Yan,

Thank you for the question.

Please note that people get on and off the bus during the journey, so the total number of people using the bus on one journey can well be above 60. However, if we are talking about rush hour and people are all travelling to central London, then once the bus is full, it won't be taking any more passengers, until it reaches the common destination.